Don't Let Fearmongers Keep You Out of the Market

The best trends rarely give you a chance to get in, especially in a fast-moving market.

Witness these past couple of weeks: Markets seemed to crack below support, but then did some heavy lifting to rise back above short-term resistance. These deep moves would make anyone queasy. However, our focus should be on trends of individual stocks -- that is where the big money is moving, as has been evident in options-trading volume, expanding stock volume and price breakouts. There's no need to be scientific in seeking out explanations or rationale.

Given the buy-the-dip mentality that has materialized after the first few days of February, one would think that there are now a number of opportunities. From the highs in late January, the markets corrected nearly 6% to reach an absurdly oversold level, per the McClellan Oscillator indicators. Money flows turned negative, and the 10-day moving average of the Arms Index (TRIN) reached a bloated level, which indicates a very oversold condition. The CBOE Volatility Index (VIX) spiked higher, as well.

At the end of 2013, didn't many folks say they were looking for a 4%-to-6% correction to get on board? Nonetheless, sentiment soured quickly, as it has done on the previous six drops: Polls leaned significantly bearish, and the put-call ratios were screaming above 100%.

Now the markets are right back up, the Nasdaq 100 is at 14-year highs and a number of individual names are overbought.

You certainly could have come on board earlier. All the ingredients for a strong snap-back. But one prevailing notion indicates that the market has to crash at some point, because it's been five long years since the last one, and nobody wants to be left holding the bag when the inevitable happens.

Does this thinking hold water? Lately, writers and bloggers have been making some interesting chart comparisons to 1929 -- when, of course, a huge selloff wiped out nearly 90% of market value. I suppose history does rhyme, and I can recognize some similarities if I merely eyeball the two charts. But, taken in context, this comparison is truly a reach. From a chart-based perspective, my good friend Jeff York has a simple answer as to whether 1929 compares with 2014: no, not even close (PDF). As you can see, there are just too many differences to consider aside from time frame. It may be fun to compare, but it's not useful to trade.

So leave aside that idea and just take your clues from past patterns and trends -- and use them until they no longer work. Several charts in particular demonstrated good relative strength during the market correction and, when it was time to move back up, those stocks did an about-face and turned higher. Netflix (NFLX), Priceline (PCLN), Tesla (TSLA), Google (GOOG), Apple (AAPL) and several others held in strong, kept their trends in place and even gave us some opportunities to get in. In the chat room we were shouting out option plays as screaming buys, and most of them worked.

If you weren't looking for it, you would have missed it. Still, you may get another chance if you maintain high awareness and keep an open mind.